In recent decades, the cost of college has skyrocketed, with a staggering increase of 361%*. It’s no longer feasible for the average student to afford college without some form of financial assistance, which is why it’s vital to start planning and saving for your child’s future as early as possible.
There are various college savings strategies available, and it’s important to understand the advantages and disadvantages of each approach. In this article, we’ll examine three of the most common options to help you compare and decide which one is best for you and your family.
529 Plans
529 plans are a type of college savings plan that comes in two forms: investment savings accounts and plans that prepay college tuition. The investment plan allows you to benefit from any stock market growth, while the tuition payment plan locks in the current tuition cost. However, tuition prepayment plans are becoming rare and limited, so we’ll focus on investment plans.
A 529 investment plan lets you contribute money after taxes, and your investment grows tax-free. Depending on your state, you may qualify for benefits that aren’t available with other plans. This investment plan is similar to a Roth IRA, but with significantly higher contribution limits, and you can use it for various approved educational expenses, such as tuition, room and board, and textbooks. However, using the funds for non-educational expenses will result in a 10% penalty and taxes.
The account is flexible and can be used for any designated beneficiary’s education, and you can change the beneficiary in the future. It’s also a parental asset, which does not have a significant impact on financial aid awards.
Savings Accounts
A savings account is a straightforward way to save money, but it has some drawbacks. You have more freedom with your money, but it’s also tempting to use it for other things instead of education. Additionally, the returns on a savings account are typically low, and inflation and the cost of college may grow faster than your savings. Finally, you won’t receive any tax benefits from a savings account, unlike other investment accounts such as a 529 plan.
Roth IRAs
A Roth IRA is an investment option that allows for flexibility in using your funds in the future, but there are contribution limits. To withdraw more than your contributions without taxes and penalties, you must have the account for at least five years or be over 59 ½. If you decide not to use the money for qualified educational expenses or if your child doesn’t need financial assistance, you can keep the money invested for your retirement. However, it’s important to have other retirement savings sources if you plan to use the account to help your child attend college.
Get Assistance with Saving for College
If you’re finding it challenging to choose the best college savings strategy for your family, consider seeking the help of a financial professional. They can guide you through the various options and help you weigh the advantages and disadvantages of each approach to determine the best fit for your family’s unique situation..
Source:
*Hanson, Melanie. “Average Cost of College & Tuition” EducationData.org, October 24, 2022, https://educationdata.org/average-cost-of-college
